SAP SCM SUMMIT Best Practices for Supply Chain Optimization in SAP for Vendor Managed Services

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1 Best Practices for Supply Chain Optimization in SAP for Vendor Managed Services Ken Kumar & Gautam Mandal SAP Supply Chain Summit, July 2011

2 About Presenters Ken Kumar, Director IT Applications, Celgene Ken s expertise is in Supply Chain and Business Applications in Life Sciences, & CPG/Retail. Ken has more than 17 years of SAP system expertise and over 20 full lifecycle SAP implementation experience. He has successfully architected several applications and led many large implementations. Gautam Mandal, Sr. Manager SAP, Cognizant Gautam has 15 years of SAP implementation experience in supply chain and customer solution area. Gautam has done over 10 full cycle SAP implementations in Life Sciences, Hi-Tech, Manufacturing, Energy & Utility, and Chemical industry sectors. 2

3 Any views or opinions presented in this material are solely those of the authors and do not necessarily represent those of the company. The company accepts no liability for the content of this material, or for the consequences of any actions taken on the basis of the information provided. 3

4 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 4

5 SAP Project Drivers Business Drivers can include the following Consolidate legacy systems into one system for quicker access and better customer service Separation of business processes and system from prior divestiture Simplify and improving the current business process Foundation to build on future growth Reduce the amount of paper reports contributing to a greener environment Optimize Legacy Pricing structures 5

6 Approaches for ERP Roll-out Big- Bang Big Bang with completed functionality High Risk and no real time evaluation of success until later Multiple phased Typical recommended strategy is multi-phase approach with manageable functionality and /or Location Phase 1: Finance, Order to Cash, Chargeback, and Procurement Phase 2: Manufacturing Operations MM/PP/QM/WM Phase 3: Supply chain Roll-out 6

7 Classic SAP Application Overview SAP integrates departments and processes across Company into one system, running of a single database, enabling various departments to share information and communicate with each other. The following SAP functions should be considered Finance & Controlling AR, AP, GL, Asset Accounting Cost Center, Cost Element, Profit Center Accounting, Internal Order and Product Costing Sales & Distribution Order to Cash IP Vistex Contract Management and Chargeback Processing Material Management Procure to Pay Subcontracting Stock transfer Batch Management and Shelf life Warehouse Management Production Planning Demand Management, MPS / MRP PP-PI : Process Orders Quality Management Quality Inspections Quality Notifications WM SolMan CRM SD MM PP SAP ECC QM Vistex BW FI CO AA GRC RWD 7

8 Classic SAP Application Overview (2) In addition to the business utilizing the business functionality of SAP, SAP houses data elements that are key outputs for the business users for decision making: Sales Reporting: A daily sales revenue report Purchasing Approval status report Chargeback report Order Reconciliation report Shipment report Government reports ASP, AMP, VA report Pick lists in warehouse Packing Slips SolMan BW Invoice CRM SD Goods issue document Purchase orders MM PP SAP ECC QM FI CO AA WM Vistex GRC RWD 8

9 A typical ERP Landscape Illustration with Vendor Managed Services SAP ECC 6.0 Trading Partner Direct Customer EDI system (GIS) Chargeback Processing (IP Vistex) Order Processing (SD) Production Planning (PP) Quality Mgmt (QM) Warehouse Mgmt (WM) Material Mgmt (MM) Finance & Controlling General Ledger Bank Accounting Accounts Payable Accounts Receivable Fixed Assets Cost Center Accounting Profit Center Accounting Internal Orders & Product Costing Excel / Fax Contract Manufacturer System EDI 3PL WMS System SAP GRC SAP BI SAP RWD BPC SAP Solution Manager (Implementation, Support, documentation, Issue, defect tracking) 9

10 Adapt SAP ASAP methodology to Validation Protocols ASAP Methodology coupled with GxP Validation Process and SOX compliance Solution Manager Validation Master Plan Release PQ Business Benefits Deliver Consistent Validation documents Reduction of cost of validation Installation Qualification (IQ) Operational Qualification (OQ) Validates hardware and software installation of Quality and Production systems Validates integrated systems / processes. Generally performed by IT / users in Quality system. It is equivalent to Integration testing or UAT User Requirements Business Process Models & Functional Specifications Design & Program Specifications HW/SW Installation Unit Testing Installation Verification Acceptance Testing Integration/System Testing IQ OQ Performance Qualification (PQ) Validates critical processes in Production system. Typically performed by users in Production system (PRD) Configuration Customizing 10

11 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 11

12 Supply Chain Processes using Vendor Managed Services (1) In the Context of Vendor Managed Services in Supply Chain operations, the following processes can be outsourced Contract Manufacturing Finished Goods Distribution using 3PL Contract Manufacturing A company plans for in-house manufacturing and external procurement Some manufacturing operations are subcontracted to a Third Party Contractor Specialized operations managed by company and subcontract general services Complete outsourcing of manufacturing operations Contract manufacturing to meet additional demands Finished Goods Quality assurance is performed by Contractor and Company 12

13 Supply Chain Processes using Vendor Managed Services (2) Finished Goods Distribution using 3PL 3PL manages the Finished goods warehouse 3PL ships the products to customer based on ship order notification from Company Key Features : Long / Medium term supply chain planning collaboration between Company and Contractor and demand/supply optimization Short term manufacturing schedule optimization e.g. sharing weekly production schedule for firm zone. Production plan amendment by Company or Contractor in collaboration if there is a resource constraint Contractor Manufacturing execution and process hand-off Collaborative Finished Goods Quality assurance Product cost calculation for Contract Manufacturing Distribution and Inventory optimization using 3PL 13

14 Supply Chain with Contract Manufacturing Operations - Schematic Diagram SAP ECC6.0 system Contractor System SAP ECC Demand Management SAP ECC MPS and MRP Demand Planning Supply Planning Demand / Supply Collaboration Demand / Supply Plan Material Management PP-PI Material Management PR for Raw Material procurement Planned Orders for Semi-Finished Subcontract PR for FG PP-PI Closed Loop Process Process Order for Inhouse Mfg (Semi-Finished) Subcontract PO & issue Semi- Finished Issue Components (Semi-finished Product) Manufacturing of Finished Goods Quality Inspection Finished Goods Inventory Quality Inspection Usage Decision Inspection Lot Goods Receipt against Subcontract PO Finished Goods Delivery Finished Goods Distribution Vendor Invoice Processing Payment Invoice Customer Invoice Processing 14

15 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 15

16 Demand /Supply Planning : SAP ECC6.0 Demand Mgmt / MPS/ MRP based solution Demand Plan using SAP ECC6.0 Demand is generated and managed using SAP Demand Management as Plan Independent requirement (PIR) Sharing Production plan data between Company and Contractor Contractor performs their Demand / Supply and Capacity Plan and high level agreement is made Supply Plan using SAP ECC6.0 MPS and MRP Monthly MPS run to get all Finished Goods manufacturing plan Weekly MRP generates Planned Order for In-house manufacturing and Purchase Requisition for external procurement and subcontract products Capacity planning to review constraint resources Communicate Medium Term production schedule to Contractor and agreement is reached. Any changes are fed back to Planning cycle Share Final weekly production schedule for firm zone 16

17 Demand / Supply Planning : Alternative Approach Demand Planning using SAP-APO Demand Planner Supply Planning using SAP-APO SNP Constraint base planning Cost and implementation complexity is much higher 17

18 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 18

19 Contract Manufacturing using PP-PI and MM Subcontract Purchase Order (1) Semi Finished Product Manufacturing using PP-PI Semi Finished Product is manufacturing using SAP ECC PP-PI Process Orders SAP WM Material Staging functionality can be used to stage Raw Materials at shop floor MM-Subcontract Order for Contract Manufacturing Semi Finished product is issued to Contractor against SAP ECC Subcontract Purchase Order Contractor completes Finished Goods Manufacturing and delivers FG and report Semi Fished Product consumption Receipt of FG and consumption of Semi Finished goods in SAP against Subcontract Orders 19

20 Contract Manufacturing using PP-PI and MM Subcontract Purchase Order (2) Finish Goods Inspection and Release Inspection Lot is generated during Goods Receipt Final release of FG will be carried out by Company. FG is released based on QA inspection report from Contractor and Company Quality Notification functionality can be used for quality defect tracking and resolutions The Release FG is moved to 3 rd Party Logistics provider for Warehousing & Distribution 20

21 Contract Manufacturing using PP-PI and External Processing - Alternative Approach External Processing of Operations In this approach, Process Order operation steps using processed externally i.e. Contract Manufacturer. For example, Operation 20 is subcontracted to external Vendor and rest of the operations are managed in house.

22 Product Cost Estimate Subcontracting Vs. External Processing Sub-Contracting Cost of Producing Semi-finished Material includes following inputs Raw Material, Labor, Machine time, Manufacturing Overheads and Quality Overheads Cost of Producing FG Material includes Bulk Material Cost, and Subcontracting Fee External Processing Cost of Producing FG Material includes Raw Material, Labor, Machine time, Manufacturing Overheads and Quality Overheads Subcontracting Fee Raw Materials Raw Materials Bill of Material Recipe Product Cost for Semi Finished Bill of Materia l Subcontract ing Fees Product Cost for Finished Goods Bill of Material Routing Product Cost for Finished Goods Labor Machine Time Mfg Overheads QA Overheads Labor Machine Time Mfg Overheads QA Overheads External Processing Fees 22

23 SAP Configuration and Customization for Contract Manufacturing Production Planning Demand Management MPS MRP PP-PI: Process Order Material Management Configure Subcontract Purchase Order 23

24 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 24

25 Product Distribution using 3 rd Party Logistics Services System design consideration Arms-Length Relationship Company and 3PL uses their own systems for internal operations OTC and Inventory processes are integrated using EDI / interfaces Provides Arm-length relationship with 3PL with independent infrastructure Extendable for other providers easily No SOX or Audit related issues Typically higher investment in process design and maintenance 3PL using company s IT infrastructure 3PL service personnel log-in in companies ERP system and perform relevant shipping and inventory management transactions No investment in process or interface design Manage separation of 3PL using tight Authorization control 25

26 3PL Arms-Length Relationship Classic scenario for OTC and Stock Transfer Stock Transfer to 3PL Location Order to Cash Processing Inventory Management SAP System Finished Goods Stock Transfer Order (STO) STO - Delivery Goods Receipt Confirmation Customer Order Delivery Invoice PGI Inventory Adjustment Transactions in SAP EDI / Interfaces Advance Ship Notification (ASN) Warehouse Receipt Ship Order to 3PL Advance Ship Notification (ASN) Inv. Adj interfaces 3PL Warehouse Goods Receipt at 3PL Warehouse Finished Goods Pick, Pack and Shipment Physical Inventory Scrapping Reporting 26

27 SAP Configuration and Customization for 3PL Arms Length Relationship Materials Management Configure Stock Transfer Order (STO) with delivery SAP ALE/IDOC and EDI or custom interface with 3PL for Shipment notification Receipt confirmation Inventory adjustment transactions Sales & Distribution Configure Order, Delivery and Billing functions SAP ALE/IDOC and EDI or custom interface with 3PL for Ship order notification to 3PL Shipment notification from 3PL 27

28 Agenda About the Presenters SAP Project Drivers Approaches for ERP Roll-out Classic SAP Application Overview A typical SAP ERP Landscape Illustration Adapt SAP ASAP methodology to Validation Protocols Supply Chain Process using Vendor Managed Services Demand / Supply Planning Contract Manufacturing Execution Product Distribution using 3PL Service Conclusion 28

29 Conclusion Organizations are moving more towards virtual entity and managed services are becoming part of organization processes Integration of ERP with third party systems for vendor managed services is a must have requirement for effective control and reporting Integration with vendor managed processes is a challenging task for IT team SAP ECC system & processes provides a great deal of flexibility in process design and implementing best practice as described in two typical processes in the presentation e.g., Third Party Contractor manages contract Manufacturing Finished Goods Warehousing & Shipment by 3PL Services 29

30 Questions? Contact: 30

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